Uncategorized September 29, 2021

Market Update September 29, 2021

I know submitting a long article to read via email is never the best option, but I thought it necessary to give some background on the whole Evergrande situation that has been slowly unraveling. Plus, all the new real estate stats are just a few days away… so I thought it perfect opportunity to provide you with some insight you won’t find elsewhere.


The TDLR: Evergrande is most likely doomed. The real risk is a bank failure, spurred by over exposure to Evergrande debt. To mitigate this, the CCP would have to bail out banks or risk the economy. Should this be a contagion, be on the look out for signs of major Chinese corporations stocks under duress, which in turn, could lead to panic on Wall Street and subsequently, our real estate market.

2008 Refresher
When Lehman Brothers collapsed in 2008 new policy was implemented that some companies were “too big to fail” due to the “contagion” they spread to economies and markets. The government wanted to insure that shoddy business practices or corporate greed wouldn’t lead waves of foreclosure, stock sell-offs, more panic selling, rinse and repeat until values have plummeted triggering a massive recession. Therefore, “too big to fail” is sometimes seen as the toothpick holding up a fragile economy.

People are worried that Evergrande might just be “too big to fail.” Because if Lehman Brothers wasn’t considered, “too big to fail” and lead to the worst recession since the Great Depression.This event lead to the passing of the $700 billion trouble asset relief program that bailed out: Wells Fargo, Citigroup, JP Morgan, Bank of American, AIG, Chase, Goldman Sachs and many more.

The question here is: “Could Evergrande be that same starting point as Lehman Brothers, triggering another recession? Or will it be bailed out by the Chinese government?”

Background on Evergrande
Evergrande is China’s largest developer and largest holder of dollar denominated bonds. Jerome Powell (Fed) and Christina Lagard (ECB) claim there is no risk of contagion. Citi Group says that the Chinese property risks going into a bear-market if Evergrande defaults on $300 billion worth of debt, who default on two payments the 20th, and have supposedly have made payments of $83 billion on the 23rd, but evidence of that these payments were actually made is missing.

Evergrande’s car company has stopped paying suppliers and even employees. Their EV car company decided not to raise capital by go public on the Shanghai stock exchange. Unsurprisingly the EV car company is down 48% this year, and Evergrande fairing even worse, down 81% on the Hong Kong exchange. On top of this, people are pulling out their money fast; real estate property mogul Joseph Lau, sold all his $45 million dollars worth of Evergrande Stock. This makes sense because: sales people are being laid off, contractors aren’t getting paid, and people are not closing on properties they wanted to move into because Evergrande cant complete the projects.

Bailout Possibilities
Evergrande could end up receiving a similar bailout like Huarong did. On the other hand, Xi Xingping is trying to crackdown on rampant speculation in the real estate and property market, so there is also a likelihood there might not be a bailout at all, but rather a “guarantee of activity” for the unbuilt 1.4 million homes. This means that local municipalities would have to coordinate with other developers to finish these incomplete projects. This would be an undue risk placed upon developers, who might end up needing a bailout themselves, because of newer restrictions in lending.

Initially, the Chinese government wanted to have more affordable housing built, so they made it really easy to borrow money for developing real estate. However, in August of 2020, the restrictions for borrowing money abruptly changed. Companies that borrowed a lot of money were basically eliminated them from further borrowing due to these new rules (larger down payments, more cash-on-hand, etc). This has made it near impossible for developers to able to acquire more debt. Additionally, since developers have become so over-leveraged, and are in such precarious financial positions, no one wants to lend them money either. This is leading to a liquidity crisis. The central bank of China has already responded by injecting the most liquidity into the economy since January. This is coupled with some the things that are currently playing ou

  1. Off-loading of 1.4 million units
  2. Slashing of home prices
  3. Halting of projects

In fact, in some places, land prices have already fallen 70% due to projects being put on hold indefinitely. These are the signs that Citigroup believes point towards a bear market or even a real estate crash in China.

Bail the Banks?
Some Chinese banks that have more of their loans exposed to Evergrande than others. The Economist believes these banks would be bailed out while Evergrande will not, in an effort to minimize contagion.

Otherwise, there might be a domino effect of failing banks, which could in turn trigger a run on the banks, leading to a collapse of the Chinese currency. This could reverberate all the way to the US because China’s role in our trade. Meaning, if China’s economy shuts down, we’re going to have problems.

Currently, for example, just one of many banks, Minsheng bank, has $647 billion under assets, and has a large exposure to Evergrande. (For comparison, Lehman Brothers had $680 billion under management before collapsing). If Evergrande goes bankrupt, Minsheng’s assets will be worth a lot less. Hence, the bank bailouts.

How bad can it get for us?
Knowing whether this is indeed a contagion style event, we need to keep a close eye on large Chinese companies such as Alibaba, Nio, JD.com, etc, for any signs of distress or heavy selling. If this sparks a panic in Wall Street, we can be sure: first our stock market,then bond market, and lastly our real estate market will be detrimentally affected. Hopefully this doesn’t happen, but it’s something we need to be on the look out for.